[Federal Register Volume 84, Number 53 (Tuesday, March 19, 2019)]
[Rules and Regulations]
[Pages 9959-9962]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05130]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9851]
RIN 1545-BN55
Guidance Under Section 851 Relating to Investments in Stock and
Securities
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: This document provides final regulations relating to the
income test used to determine whether a corporation may qualify as a
regulated investment company (RIC) for Federal income tax purposes.
These final regulations provide guidance to corporations that intend to
qualify as RICs.
DATES:
Effective date: These regulations are effective on March 19, 2019.
Applicability date: For the date of applicability, see Sec. 1.851-
2(d).
FOR FURTHER INFORMATION CONTACT: Matthew Howard at (202) 317-7053 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) relating to RICs. Section 851 of the Internal Revenue Code
(Code) sets forth requirements for qualifying as a RIC.
On September 28, 2016, a notice of proposed rulemaking (REG-123600-
16) was published in the Federal Register (81 FR 66576) under section
851. No public hearing was requested or held. Written or electronic
comments responding to the notice of proposed rulemaking were received.
After consideration of all the comments, the proposed regulations are
adopted as revised by this Treasury decision containing final
regulations. The revisions to the proposed regulations are discussed in
the Summary of Comments and Explanation of Revisions.
Summary of Comments and Explanation of Revisions
In response to the notice of proposed rulemaking, the IRS received
five written comments that are available for public inspection at
www.regulations.gov or upon request.
A. Revisions Due to Statutory Changes
The notice of proposed rulemaking proposed revisions to Sec.
1.851-2(b)(1),
[[Page 9960]]
which had been published in the Federal Register (25 FR 11910) on
November 26, 1960, as part of TD 6500 (1960 final regulations). The
proposed revisions would conform Sec. 1.851-2(b)(1) to several changes
to the statutory text of section 851(b)(2) enacted after the 1960 final
regulations were published. See Public Law 95-345, 2(a)(3), 92 Stat.
481, 481 (1978); Tax Reform Act of 1986, Public Law 99-514, 653(b), 100
Stat. 2085, 2298 (1986); Taxpayer Relief Act of 1997, Public Law 105-
34, 1271(a), 111 Stat. 788, 1036 (1997). No comments were received on
these proposed revisions. Accordingly, the final regulations adopt the
revisions to Sec. 1.851-2(b)(1) as proposed.
B. Defining Securities
In the notice of proposed rulemaking, the Department of the
Treasury (Treasury Department) and the IRS determined that the IRS
should no longer issue private letter rulings on questions relating to
the treatment of a corporation as a RIC that require a determination of
whether a financial instrument or position is a security under the
Investment Company Act of 1940, Public Law 76-768, 54 Stat. 789
(codified as amended at 15 U.S.C. 80a-1--80a-64 (2016)) (1940 Act).
Contemporaneously with the publication of the notice of proposed
rulemaking, the Treasury Department and the IRS issued Rev. Proc. 2016-
50 (2016-43 I.R.B. 522), which provides that the IRS ordinarily will
not issue rulings or determination letters on any issue relating to the
treatment of a corporation as a RIC that requires a determination of
whether a financial instrument or position is a security under the 1940
Act. One commenter recommended that the IRS not add this issue to the
no-rule list and that the IRS continue to consider ruling requests in
situations in which the status of an investment as a security under
section 2(a)(36) of the 1940 Act is sufficiently clear under the
language of the 1940 Act or under relevant guidance from the SEC. In
issuing the notice of proposed rulemaking and Rev. Proc. 2016-50, the
Treasury Department and the IRS considered the issues, the resource
constraints of the IRS, and the jurisdiction of the SEC under the 1940
Act and determined that the IRS ordinarily should not issue rulings
that require a determination by the IRS of whether a financial
instrument or position is a security under the 1940 Act. If the
security status of an instrument is sufficiently clear under the 1940
Act, or if the SEC has issued relevant guidance, any other requested
ruling may be considered by the IRS subject to other limitations
applicable to all ruling requests. See, for example, section 6 of Rev.
Proc. 2019-1 (2019-1 I.R.B. 1, 18). The IRS therefore declines to adopt
the suggestion and has continued to include the issue described in Rev.
Proc. 2016-50 in the list of areas in which rulings or determinations
letters will not ordinarily be issued. See, for example, section
4.01(44) of Rev. Proc. 2019-3 (2019-1 I.R.B. 130, 140).
In the notice of proposed rulemaking, the Treasury Department and
the IRS also requested comments as to whether Rev. Rul. 2006-1 (2006-1
C.B. 261), Rev. Rul. 2006-31 (2006-1 C.B. 1133), and other previously
issued guidance involving determinations of whether a financial
instrument or position held by a RIC is a security under the 1940 Act
should be withdrawn. Commenters recommended that Rev. Rul. 2006-1 and
Rev. Rul. 2006-31 not be withdrawn because RICs rely on those rulings
to invest with confidence in certain derivatives on stocks and
securities. The commenters suggested that withdrawal of those rulings
would create confusion and uncertainty with respect to investments by a
RIC. After consideration of the comments, the Treasury Department and
the IRS have decided not to withdraw the revenue rulings at this time.
C. Inclusions Under Section 951(a)(1) or 1293(a)
In certain circumstances, a U.S. person may be required under
section 951(a)(1) or 1293(a) to include in taxable income certain
earnings of a foreign corporation in which the U.S. person holds an
interest, without regard to whether the foreign corporation makes a
distribution to the U.S. person. The Tax Reduction Act of 1975, Public
Law 94-12, 602, 89 Stat. 26, 58 (1975 Act), substantially increased the
overall amount of these inclusions. Because these inclusions are not
dividends (even if accompanied by a corresponding distribution), they
would have been non-qualifying gross income for RICs. However, the same
subsection of the 1975 Act that increased the amount of inclusions also
amended section 851(b). This amendment provided that an inclusion under
section 951 was treated as a dividend (and therefore qualifying income
for purposes of section 851(b)(2)) if the inclusion was accompanied by
a distribution out of the earnings and profits of the taxable year that
are attributable to the amounts so included. The Tax Reform Act of
1986, Public Law 99-514, 1235, 100 Stat. 2085, 2575 (1986 Act),
provided the same dividend treatment for amounts included in income
under section 1293(a). The current version of the language added by the
1975 and 1986 amendments provides:
For purposes of [section 851(b)(2)], there shall be treated as
dividends amounts included in gross income under section
951(a)(1)(A) or 1293(a) for the taxable year to the extent that,
under section 959(a)(1) or 1293(c) (as the case may be), there is a
distribution out of the earnings and profits of the taxable year
which are attributable to the amounts so included.
The 1986 Act also added to the description of a RIC's qualifying
income ``other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of
investing in . . . stock, securities, or currencies.''
The amendments to section 851(b) by the 1975 Act and the 1986 Act
unambiguously condition dividend treatment of an inclusion under
section 951(a)(1)(A) or 1293(a) on a distribution from the foreign
corporation's earnings and profits attributable to the amount included.
Absent a distribution, there is no support in the Code for treating an
inclusion under section 951(a)(1)(A) or 1293(a) as a dividend under
section 851. The proposed regulations would, therefore, clarify that an
inclusion under section 951(a)(1)(A) or 1293(a) is treated as a
dividend for purposes of section 851(b)(2) only to the extent that the
distribution requirement in section 851(b) is met. All five commenters
acknowledged that the distribution requirement for dividend treatment
in the proposed regulations is consistent with the statutory language
in section 851(b). Accordingly, the final regulations adopt the
clarification of the distribution requirement as proposed.
The proposed regulations, however, also would provide that dividend
treatment is the only manner in which an inclusion under section
951(a)(1) or 1293(a) may be qualifying income. That is, under the
proposed regulations, for purposes of section 851(b)(2) neither of
these inclusions would be other income derived with respect to a RIC's
business of investing in stock, securities, or currencies (Non-
qualifying Income Proposal). Commenters unanimously recommended that
the Treasury Department and the IRS exclude the Non-qualifying Income
Proposal from the final regulations. Commenters noted that some RICs
have no ability to control when, or whether, distributions are made and
may have income inclusions in excess of available or allowable
distributions.
Commenters also suggested that the Non-qualifying Income Proposal
would produce inconsistent results. For example, if a RIC has income
inclusions
[[Page 9961]]
with respect to a passive foreign investment company (PFIC) as a result
of making a mark-to-market election under section 1296 with respect to
the PFIC, the RIC would have qualifying income under section 851(b).
See section 1296(h), which specifically treats that income as a
dividend even though there has been no distribution. In contrast, if
the RIC had made a qualified electing fund election under section 1293
with respect to a PFIC, then the Non-qualifying Income Proposal would
prevent income inclusions with respect to that PFIC from being
qualifying income.
The Treasury Department and the IRS have carefully considered the
comments and recognize that the Non-qualifying Income Proposal creates
an unintended effect on the RIC income test of section 851(b)(2). For
example, certain types of income, such as interest and dividends, would
be considered qualifying income if earned directly by a RIC. These
types of income, however, would not be qualifying income when received
by a controlled foreign corporation or PFIC and included in a RIC's
income under section 951(a)(1) or 1293(a), unless there is a
corresponding distribution. Accordingly, the Treasury Department and
the IRS have decided not to include the Non-qualifying Income Proposal
in these final regulations.
One commenter further recommended that the final regulations treat
inclusions under sections 951(a)(1)(A) and 1293(a) derived with respect
to a RIC's business of investing in stock, securities, or currencies as
other qualifying income for purposes of the RIC income test of section
851(b)(2) (Qualifying Income Proposal). The Treasury Department and the
IRS recognize that inclusions under sections 951(a)(1) and 1293(a) with
respect to which there are no corresponding distributions may be
accelerations of income derived from stock that otherwise would be
recognized as a dividend or as gain from the sale or other disposition
of stock. The Qualifying Income Proposal recommended by the commenter
would treat these inclusions as qualifying income for purposes of
section 851(b)(2). That is, it would apply to inclusions with respect
to which there are no corresponding contemporaneous distributions and
which otherwise would not be treated as dividends even though those
inclusions are connected to a RIC's business of investing in stock,
securities, or currencies. After further consideration of the issues
raised by the commenter and the provisions in ``An Act to provide for
reconciliation pursuant to titles II and V of the concurrent resolution
on the budget for fiscal year 2018,'' Public Law 115-97, title 1, Sec.
11000, 131 Stat. 2054 (Dec. 22, 2017), affecting the taxation of income
earned outside of the United States, the Treasury Department and the
IRS adopt the Qualifying Income Proposal in the final regulations.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Treasury Department and the Office of Management
and Budget regarding review of tax regulations.
Because these regulations do not impose a collection of information
on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking preceding these regulations was
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business, and no
comments were received.
Statement of Availability of IRS Documents
The IRS revenue procedures and revenue rulings cited in this
document are published in the Internal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Superintendent of Documents, U.S.
Government Publishing Office, Washington, DC 20402, or by visiting the
IRS website at www.irs.gov.
Drafting Information
The principal author of these final regulations is Matthew Howard,
Office of Associate Chief Counsel (Financial Institutions and
Products). However, other personnel from the Treasury Department and
the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.851-2 is amended by revising paragraphs (b)(1) and
(b)(2)(i), and adding paragraphs (b)(2)(iii) and (d) to read as
follows:
Sec. 1.851-2 Limitations.
* * * * *
(b) * * *
(1) General rule. A corporation will not be a regulated investment
company for a taxable year unless 90 percent of its gross income for
that year is income described in paragraph (b)(1)(i) or (ii) of this
section. Any loss from the sale or other disposition of stock or
securities is not taken into account in the gross income computation.
(i) Gross income amounts. Income is described in this paragraph
(b)(1)(i) if it is gross income derived from:
(A) Dividends;
(B) Interest;
(C) Payments with respect to securities loans (as defined in
section 512(a)(5));
(D) Gains from the sale or other disposition of stocks or
securities (as defined in section 2(a)(36) of the Investment Company
Act of 1940, as amended);
(E) Gains from the sale or other disposition of foreign currencies;
or
(F) Other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to a regulated
investment company's business of investing in such stock, securities,
or currencies.
(ii) Income from a publicly traded partnership. Income is described
in this paragraph (b)(1)(ii) if it is net income derived from an
interest in a qualified publicly traded partnership (as defined in
section 851(h)).
(2) * * *
(i) For purposes of section 851(b)(2)(A) and paragraph (b)(1)(i)(A)
of this section, amounts included in gross income for the taxable year
under section 951(a)(1)(A) or 1293(a) are treated as dividends only to
the extent that, under section 959(a)(1) or 1293(c) (as the case may
be), there is a distribution out of the earnings and profits of the
taxable year that are attributable to the amounts included in gross
income for the taxable year under section 951(a)(1)(A) or 1293(a). For
allocation of distributions to earnings and profits of foreign
corporations, see Sec. 1.959-3.
* * * * *
(iii) If an amount is included in gross income under section
951(a)(1) or 1293(a) and is derived with respect to a corporation's
business of investing in stock, securities, or currencies then the
amount is other income described in section 851(b)(2)(A) and paragraph
(b)(1)(i)(F) of this section. Notwithstanding paragraph (d) of this
[[Page 9962]]
section, a taxpayer may rely on the rule in this paragraph (b)(2)(iii)
for taxable years that begin after September 28, 2016.
* * * * *
(d) Applicability date. The rules in paragraphs (b)(1) and
(b)(2)(i) and (iii) of this section apply to taxable years that begin
after June 17, 2019.
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
Approved: February 15, 2019,
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-05130 Filed 3-18-19; 8:45 am]
BILLING CODE 4830-01-P